National Institute of Economic and Social Research

Thursday, 22 March 2012

Budget commentary (from the FT)

My brief commentary on the Budget, from the FT (print edition, but not online) is below:

"Perhaps the most interesting - and depressing - economic news on Budget Day came not in the Budget itself, but in the ONS's figures for the government's finances. We have had a deep recession, and recovery has been unprecedentedly slow. As a direct consequence of this weakness, long-term interest rates are extremely low, and unemployment is expected to remain far too high for too long.

In such circumstances, it's not so much Keynesianism as plain common sense to suggest that the government should be spending more money on infrastructure investment; as Martin Wolf has said in this paper, the markets, and indeed the economy as a whole, are saying "Borrow and spend, please." But public sector net investment has actually fallen sharply. Two years ago, public sector net investment was £44 billion. This year it will be under £30 billion. But this Budget will do nothing to address the two most obvious problems that economic policy could actually do something about: the UK's creaking infrastructure, and the long-term social and economic damage that will inevitably be produced if we allow current levels of unemployment to persist.

The tax changes are also disappointing. Replacing the 50p rate with a substantial property tax would have substantial benefits; it would improve economic efficiency, reduce the deadweight costs of taxation, redistribute wealth and potentially improve social mobility. Replacing it with higher stamp duty - a "dreadful tax" - for the most expensive properties will do none of these. Meanwhile - to add to the current bizarre system under which those earning between £100,000 and £115,000 pay a 60% marginal tax rate - families with children earning between £50,000 and £60,000 will now face marginal tax rates of 50% to 60%, much higher than those at the very top.

To end on a positive note: although the government has got the short-term fiscal judgement wrong, the UK does face serious long-term fiscal challenges, and the commitment to index the state pension age to longevity is perhaps the most important single policy action the government could take. This is a brave and welcome move."